The Association Between Corporate Social Responsibility Activities And Earnings Quality: Evidence From Donations And Voluntary Issuance Of CSR Reports

Abstract

This paper examines the association between the level of corporate social responsibility (CSR) activities and earnings quality with the level of donation expenses and the voluntary issuance of CSR reports filed with the Global Reporting Initiative (GRI) as proxies for CSR activities. Donation expenditures could be the most direct measure of managers’ willingness to conduct CSR activities, while the voluntary issuance of CSR reports filed with GRI captures a direct signal of managers’ willingness to conduct CSR activities. The results of this study provide evidence that firms active in CSR are likely to report earnings of a higher quality. More specifically, after controlling for firm-specific factors, we find that firms with more corporate donations have lower discretionary accruals and greater accounting conservatism. Furthermore, this negative relationship between donation and discretionary accruals is more pronounced when firms voluntarily issue CSR reports. Prior studies have focused on the association between financial performance and CSR activities of firms. However, managerial choices and signals on financial performance with voluntary CSR activities have not been specifically considered. This study adds to the existing literature on CSR by providing evidence of the role of CSR on earnings quality and helps academics and practitioners to understand the role of corporate donations and voluntary CSR disclosures in earnings quality.